By Caleb Williams, Attorney in the Business & Taxation Law Practice Group
On May 5, 2020, the Department of Treasury updated the PPP Frequently Asked Questions to announce it was extending the safe-harbor deadline for repayment of unneeded PPP loan proceeds to May 14, 2020. The original guidance provided that the safe harbor ended on May 7, 2020.
Created under the Federal CARES Act, which was signed into law on March 27, 2020, small businesses were strongly encouraged to obtain PPP loans to address the anticipated economic challenges resulting from government restrictions on business intended to slow the spread of coronavirus. The CARES Act specifically stated that the typical Small Business Administration (SBA) loan requirement that borrowers must not be able to obtain credit elsewhere does not apply to PPP loans. Businesses rushed to apply for the loan. Certainly, many companies applied for a PPP loan that did not need the financing at the time of application, but who in good faith were concerned as to what the coming weeks and months might hold for business. Mounting criticism caused by the quick depletion of the PPP funds and the receipt of PPP funds by several larger businesses and franchises led to new guidelines intended to clarify who qualifies for the PPP loans, including by requiring that companies not have access to alternative sources of capital.
At the time of applying for a PPP loan, a borrower must certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” On April 23, the SBA and Department of the Treasury issued a PPP loan Frequently Asked Questions providing that this certification must have been made “in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.”
In order to ensure compliance with this certification requirement, the Department of Treasury will audit the PPP loans as necessary, including an audit of all PPP loans in excess of $2 million. Borrowers who fraudulently made this certification could face civil and criminal punishments, including imprisonment.
If your company is a recipient of a PPP loan and can certify the need for the loan, we recommend taking the following steps to evidence the company’s good faith in applying for the PPP loan:
– Maintain records showing a decline in revenue or business activity from a prior period or from your company’s initial 2020 projections.
– Document the company’s evaluation of its need for a PPP loan in minutes of a meeting of the owners and/or directors. Topics that should be addressed include:
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- The financial and operational impact that COVID-19 has had on your company.’
- The company’s lack of access to other sources of capital.
- The company’s liquidity position without the PPP loan.
- Any other reasons the company has for needing the PPP loan.
- The eligible expenses that the company will pay using the PPP loan.
– Maintain records of all eligible expenses paid using the PPP loan and when paid.
Rules and guidance for PPP loans are constantly evolving, so be sure to check the COVID-19 Resource Page for the most current information available. Please contact our office if you have any questions regarding the PPP or if you need assistance documenting your compliance with this new guidance.
Caleb Williams is a partner in the Business & Taxation Law practice group and a member of the Agri-Business and Wine & Vine industry teams. The information in this article is not intended to provide legal advice. For professional consultation, please contact Caleb at cwilliams@sglaw.com at Saalfeld Griggs PC. 503.399.1070. © 2020 Saalfeld Griggs PC
